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Complex Evolutionary Systems in Behavioral Finance

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  • Cars Hommes

    (University of Amsterdam)

  • Florian Wagener

    (University of Amsterdam)

Abstract

This discussion paper led to a chapter in: (K.R. Schenk-Hoppe & T. Hens (Eds.,)) Handbook of Financial Markets: Dynamics and Evolution , Amsterdam:North Holland/Elsevier, 2009. Traditional finance is built on the rationality paradigm. This chapter discusses simple models from an alternative approach in which financial markets are viewed as complex evolutionary systems. Agents are boundedly rational and base their investment decisions upon market forecasting heuristics. Prices and beliefs about future prices co-evolve over time with mutual feedback. Strategy choice is driven by evolutionary selection, so that agents tend to adopt strategies that were successful in the past. Calibration of "simple complexity models" with heterogeneous expectations to real financial market data and laboratory experiments with human subjects are also discussed.

Suggested Citation

  • Cars Hommes & Florian Wagener, 2008. "Complex Evolutionary Systems in Behavioral Finance," Tinbergen Institute Discussion Papers 08-054/1, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20080054
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    1. Wei-Xing Zhou & Guo-Hua Mu & Si-Wei Chen & Didier Sornette, "undated". "Strategies used as Spectroscopy of Financial Markets Reveal New Stylized Facts," Working Papers ETH-RC-11-005, ETH Zurich, Chair of Systems Design.
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    More about this item

    Keywords

    Asset pricing; heterogeneous beliefs; empirical validation; forecasting experiments;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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    This paper has been announced in the following NEP Reports:

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